Why do airlines overbook their flights?

We’ve all been there: You arrive at the gate and it turns out there are more passengers wanting to fly from point A to point B than there are seats on the plane. You wouldn’t be the first person to have thought the thought that, “Well gee, if you only have 200 seats, why would you sell more than 200 tickets?” It turns out, however, that there are a couple of excellent reasons for doing this, powered by money, efficiency and a whole lot of statistical analysis.

Moving 900 million passengers around within the U.S. every year is no mean feat, and people travel for all sorts of different reasons, with leisure and business being the two dominating categories. The thing is, not everybody turns up to every flight. On average, the number of people not turning up to flights is around 5 percent, but, in certain circumstances, that number can be up to 15 percent. Obviously, that puts airlines in an interesting position.

Sometimes too many people turn up to a flight. Usually, this is resolved by asking people to volunteer not to fly, but that doesn’t always work out. Last year, 46,000 travelers were involuntarily bumped from flights.

Your ticket isn’t for a specific seat

The thing is, when you book a flight, you book a plane ticket from, say, New York to San Francisco. You do usually choose which plane you want to get on. You may even choose a seat, but technically, you’re not buying that specific seat on that specific flight. You are buying a journey from one city to another. If you are coming in from London and you miss your connection in New York, for example, the airline will usually re-book you onto a different flight without extra charge. The same usually happens if you arrive 10 minutes late because of traffic.

If you have a flexible ticket, you can also switch your ticket from one flight to another, sometimes at very late notice. If you’re a business traveler, you’re among royalty: You are one of 12 percent of passengers on the flight, but you represent 60 percent of an airline’s revenues. Why? Because business travelers usually need the highest degree of flexibility. A meeting might run late, or an opportunity might come up so you need to take an earlier or later flight, possibly to another destination. That also means that if you are among that group, you’ll probably fly on the flight you’re booked on, even if you’re not flying business class and even if the flight is “full.”

All of which is to say that if you sell 200 tickets to a particular flight, a number of your passengers may not turn up to the flight. So what do you do?

One option would be to fly with empty seats, but that’s the worst possible scenario in an industry that can run at a profit margin of as little as 1 percent. From a financial point of view, this causes lost revenues (a plane flying at less than full capacity is a waste of money). More importantly, unused tickets cause a liability on the balance sheet — the tickets you sold are often still valid, you just don’t know exactly when those passengers are going to show up to try to re-book their seats.

To try to avoid this, airlines use a wealth of statistical data to try to ensure that the flights are as full as possible, and if they maximize for customer satisfaction, they often get it right.

When people don’t turn up

You may have seen an airline offer someone $500 to voluntarily give up their seat on a flight because they are overbooked. If you are going to a funeral, to an important meeting or if you’re a doctor on your way to see a patient, that may not fly. If you’re on your way on a holiday, however, and you figure that $500 to spend on another flight later in the year means a free trip to visit the family, you may be willing to let yourself be bumped off the flight.

“The money we offer passengers to give up their seats makes perfect sense to us,” says George, a statistician who works at a major airline, but who wishes to remain anonymous as he’s not been cleared to speak with TechCrunch. “It is far cheaper to give someone a $500 travel voucher every now and again than letting planes fly at less than full capacity.”

When you spend $500 on a flight, it means that $500 disappears from your bank account. When an airline gives you a $500 voucher, it isn’t even nearly $500 worth of losses to them.

“Personally, I see the travel vouchers as penalties. We have to give them out when I don’t do my job well enough, and they help inform the algorithms we use to figure out how much to overbook certain routes.”

Making overbooking predictable

“It turns out that a lot about business travel is predictable. If there is a Super Bowl happening in Houston, Texas, we often see a sharp uptick in the percentage of people who actually use their tickets. The reason is simple: If you have a Super Bowl ticket, you’re not going to want to miss the game, so you’ll use your flight ticket. When that happens, we are aware of it, and we adjust our models to ensure there’s a lower percentage of overbooking,” George says. “The reason is that there’s a much bigger downside to not letting people fly. The PR cost of someone not making it to the Super Bowl is greater than flying with one or two empty seats.”

“Similarly, we see a huge spike around Thanksgiving and Christmas,” George continues. “When people fly home for the holidays, the number of people who fail to use their tickets drop significantly. And, much like when the Super Bowl happens, the downside for us if someone fails to make it home for Christmas is significant. Worst-case scenario, someone makes a mental note never to fly with us again.”

On any given Tuesday, however, the situation is different; people can — and often do — miss flights for various reasons, whether that happens because of delayed connecting flights, a traffic accident on the way to the airport or something else happening in people’s lives that means they are unable to travel or they prioritize something else in their lives above going to the airport.

“Budget tickets are our way to try to resolve some of that,” George tells us. “With non-flex tickets, we are giving you a great deal on air travel, but we attach a significant penalty to not turning up to your flight: They are expensive to re-book, and if you miss your flight, you have to buy another ticket.”

Putting together a 1 billion-piece puzzle

In the process of having different ticket classes, the airlines have created a way for passengers to self-select into different risk categories.

“If you buy a Y class ticket,” says George, referring to the airline’s classification of economy, non-flex tickets, “you have given us a piece of information. This helps inform how high of a risk you are for not turning up to the flight. I work with an enormous data set going back decades, which means that if you fly on April the 11th, on a direct flight from San Francisco to New York without flight connections on an economy ticket, the weather forecast is calm, and a few other factors, I can tell to a pretty high statistical accuracy whether or not your butt is going to be in seat 17A when the plane takes off.”

The problem, of course, is that all of this is statistics, and all statistics come with a margin of error.

“We try to correct our error margins. If we mis-calculate in a way that results in empty seats, we hope there are people on standby tickets who can fill the seats,” George explains. “If we get it wrong in the other direction, there are luckily usually a few passengers who are willing to take a couple of hundred dollars’ worth of vouchers and a hotel room in order to compensate.”

“Of course, we can change our financial model in such a way that everybody is always guaranteed a seat on the flight they booked: It means selling 180 tickets for a 200-seat plane. The remaining 20 tickets would be for people who were delayed for an earlier plane, or who for other reasons need to get re-booked. But doing so would make the price per ticket much more expensive,” George explains, and tells me that airline seats are basically interchangeable goods: It doesn’t matter if the metal tube you are flying in has Virgin, United or American Airlines written on the side of it, as long as it gets you from one place to another.

Ultimately, air travel is a cut-throat, extremely low profit margin business. If George’s airline changes its booking model to guarantee that everybody flies, they will soon be flying mostly empty planes. And soon after that, they probably won’t be flying at all. Some people are willing to buy tickets for an airline that’s 20 percent more expensive… But not enough to make it a viable business.